Obviously, the answer to all of those questions is no. What determines the success or failure of the above countries is economic policy. Some of them follow the right recipe. Others don’t.
Unfortunately, that’s a lesson some people don’t want to learn.
To make matters worse, there are people who actively push the wrong recipe.
In an article for the Washington Post, Christian Shepherd and Lyric Li discuss China’s effort to buy friends in the developing world. Here are some excerpts.
Chinese leader Xi Jinping on Wednesday laid out a vision for a revamped version of his signature “Belt and Road” investment initiative and promised continued economic support for nations that sign on to China’s remade world order. …Xi presented the plan as an alternative route to riches than that offered by the United States and other industrial democracies, which he accused of holding back developing nations with trade sanctions and demands for political reform. …His signature project has ballooned into a $1 trillion endeavor, but it is still only a loosely coordinated network of power plants, ports, roads and railways. It has generated significant controversy, with host countries like Sri L anka and Nepal struggling to overcome mounting debt distress… A white paper released last week lays out Xi’s bold claim that China, through the Belt and Road, offers a new route to wealth for nations disillusioned with Western-led globalization, and promises a greater share of spoils for the Global South if the world develops according to Beijing’s playbook. “It is no longer acceptable that only a few countries dominate world economic development, control economic rules, and enjoy development fruits,” the paper stated.
What’s really going on, of course, is that China is trying to buy friends with foreign aid.
But here’s a newsflash. There is no reason to think that Chinese foreign aid will be any more successful than American foreign aid.
P.S. Not everything Xi said was wrong. Western nations do hurt developing nations (as well as themselves) with protectionism. And it’s also true that extraterritorial bullying by the United States causes resentment in affected countries (and helps to explain why many governments would like to end the dollar’s role as the world’s reserve currency).
P.P.S. The moral of the story is that poor nations should ignore China and the United States and take responsibility for their own economic future. The route to prosperity is simple and straightforward (though not popular with politicians since they have less power).
But since I routinely criticize bad policy around the world, that was not special (and since politicians at home and abroad generally ignore my advice, it also was not effective).
However, a silver lining to the dark cloud of Putin’s invasion is that there is now a lot of serious discussion of how Ukraine can prosper once the war is over.
I wrote last year that Ukraine could simply adopt the best policies of other European nations, an approach that overnight would give Ukraine one of the world’s freest economies.
Sadly, not everyone agrees. The Washington Posteditorialized on this topic and wrote that Ukraine needed massive government-to-government transfers.
Planning for Ukraine’s reconstruction needs to start now… But the staggering sums required to do the job are beyond what is financially, logistically and politically feasible for the foreseeable future. …Ukraine is already struggling to pay its short-term bills. As the conference on Ukraine convened, aid packages to help stabilize Kyiv’s finances — including paying government and military salaries — were announced by the European Union, the United States, Britain and others. …The West hopes much of the eventual rebuilding cost will be borne by private companies hoping for profits. Yet there is little chance of that without an international effort to provide insurance against the ongoing risk of future Russian missile strikes that could lay waste to half-finished factories and office buildings.
The editorial makes a few good points, including whether private investment would materialize if there was an ongoing threat of war. The piece also speculated about whether frozen Russian assets could be used for rebuilding.
Those reasonable points, however, are offset by a mistaken assumption that foreign aid is the key.
Instead of asking if there is enough money to rebuild Ukraine, the editorial should have asked if there’s enough freedom (being a thoughtful guy, I even created a more accurate title).
I’m not the only one thinking more economic liberty is the real solution.
Here are some excerpts from a column by Rainer Zitelmann, which was published by the Foundation for Economic Education.
…libertarian think tanks and politicians are already making plans for the period after the war. …Maryan Zablotskyy, a Member of the Ukrainian Parliament and of Ukrainian president Volodymyr Zelenskyy’s ruling party. …Income tax in Ukraine, Zablotskyy said, was recently lowered to two percent, and numerous regulations and tariffs have been abolished. …It is beyond extraordinary for a country to cut taxes and abolish regulations while it is at war. Normally, in wartime, governments massively increase taxes and expand their reach. …The goal, Zablotskyy says, is to ensure that these economic reforms, which were adopted as temporary measures, remain in place after the war. …Everyone agrees that there is an urgent need for reform, especially as so many of the regulations in force in Ukraine date back to the Soviet era of the 1970s. …it is not a Marshall Plan that will help Ukraine, but only market-economy reforms.
Amen. The Marshall Plan to aid Europe after World War II. was largely ineffective. Or even harmful. We should not repeat that mistake in Ukraine.
As shown by Germany’s post-war economic miracle, free markets are the answer. The difference between West Germany and East Germany tells us everything we need to know.
If asked to name things that get support from well-meaning people, but in practice often operate as scams, I would list foreign aid and climate change.
So what happens when you mix these issues together?
You get utter absurdity, as documented in a massive report by Reuters.
Authored by Emma Rumney, Irene Casado Sánchez, Jaimi Dowdell, Misato Nakayama, Sakura Murakami, and Kiyoshi Takenaka, it explains that climate-related foreign aid is basically a dishonest racket.
Italy helped a retailer open chocolate and gelato stores across Asia. The United States offered a loan for a coastal hotel expansion in Haiti. Belgium backed the film “La Tierra Roja,” a love story set in the Argentine rainforest. And Japan is financing a new coal plant in Bangladesh and an airport expansion in Egypt. Funding for the five projects totaled $2.6 billion, and all four countries counted their backing as so-called “climate finance” – grants, loans, bonds, equity investments and other contributions meant to help developing nations reduce emissions and adapt to a warming world. Developed nations have pledged to funnel a combined total of $100 billion a year toward this goal… Although a coal plant, a hotel, chocolate stores, a movie and an airport expansion don’t seem like efforts to combat global warming, nothing prevented the governments that funded them from reporting them as such to the United Nations and counting them toward their giving total. …Countries are not required to report project details. The descriptions they disclose are often vague or non-existent – so much so that in thousands of cases, they don’t even identify the country where the money went. Even receiving countries listed in the reports sometimes couldn’t say how the money was spent.
Who is paying for this nonsense?
Here’s a list of the donor nations. I definitely feel sorry for German and Japanese taxpayers.
And why are governments squandering money this way?
Here are some more excerpts that explain the answer.
Wealthy nations…committed, first in 2009 and again in 2015 under the Paris climate agreement, to a collective goal: $100 billion a year in grants, loans, private sector investments and more by 2020. More than a decade after the first pledge was made, nations have yet to meet their promise. They fell $16.7 billion short of the $100 billion goal in 2020 and are expected to miss it again when contributions are tallied for 2021 and 2022, according to OECD estimates. There are no penalties for missing the target, aside from criticism from those who say governments are not doing enough to combat global warming.
Here’s another visual from the Reuters report.
In this case, we see the nations that are getting the loot.
P.S. I’m surprised that China does not show up as a significant donor or recipient. Does that show that Chinese politicians are too smart to waste money on other countries or too dumb to get money from other countries?
P.P.S. If y0u want to know why the global warming issue is a scam, click here, here, here, here, and here.
In Part I, I wrote about kleptocrats exploiting the issue to shake down western governments for enormous amounts of aid money.
In Part II, I noted how then-Secretary of State Hillary Clinton, using tens of billions of dollars from American taxpayers, wanted to bribe third-world governments into adopting anti-energy measures
In Part III, I explained how the Kyoto Protocol encourages the destruction of jobs in western nations.
In Part IV, I warned that environmental extremists were using government coercion to line their pockets and stifle dissent.
Now we have a fifth installment in the series.
Here are the details, based on a report in the New York Times by Brad Plumer, Max Bearak, Lisa Friedman and Jenny Gross.
Diplomats from nearly 200 countries concluded two weeks of climate talks on Sunday by agreeing to establish a fund that would help poor, vulnerable countries… The decision on payments for loss and damage caused by global warming represented a breakthrough… the United States and other wealthy countries had long blocked the idea… Developing nations — largely from Asia, Africa, Latin America, the Caribbean and South Pacific — fought first to place the debate over a loss and damage fund on the formal agenda of the two-week summit. And then they were relentless in their pressure campaign.
The agreement is the bad news.
The good news is that having some bureaucrats sign an agreement does not automatically mean American tax dollars will wind up in the pockets of corrupt government officials overseas.
…major hurdles remain. There is no guarantee that wealthy countries will deposit money into the fund. …And while American diplomats agreed to a fund, money must be appropriated by Congress. …With Republicans set to take over the House in January, the prospects of Congress approving an entirely new pot of money for loss and damage appear dim. “Sending U.S. taxpayer dollars to a U.N. sponsored green slush fund is completely misguided,” said Senator John Barrasso, Republican of Wyoming. “The Biden administration should focus on lowering spending at home, not shipping money to the U.N.
At the risk of understatement, I agree with Sen. Barrasso.
The Wall Street Journal opined against the proposed wealth transfer.
The use of climate policy to soak Americans keeps getting worse, and the United Nation’s climate conference in Egypt ended this weekend with agreement on a new fund to pay reparations to poor countries. Welcome to the latest climate shakedown. …Details about the reparations fund—such as which countries will pay, how much, and which countries will benefit—will be fleshed out over the next year. Biden officials claim the agreement doesn’t create new liabilities for Americans. But the U.S. and Europe are conceding the principle… American taxpayers are being asked to pay because the U.S. industrialized first and then lifted billions of people out of poverty via investment and trade. …Countries might also shake down U.S. fossil-fuel producers in their own courts. Climate reparations will merely serve as another form of global income redistribution.
There’s one other issue worth mentioning.
As Andrew Follett explains for National Review, China’s getting a sweet deal.
…it is a total shakedown. A major beneficiary of the deal is China, despite the fact that it has much higher emissions than the United States. …That’s because “the United Nations currently classifies China as a developing country. Even though it is now the world’s biggest emitter of greenhouse gasses as well as the second-largest economy,” according to the New York Times. “China has fiercely resisted being treated as a developed nation in global climate talks,” and it makes sense why. …American taxpayers will be forced to directly or indirectly fund Communist China. …Despite emitting far less than our international rival.
For what it’s worth, it seems that major western nations want to make sure the new fund does not provide direct handouts to China.
But so long as China gets to self-classify as a developing nation, any expansion of climate schemes will enhance its competitive advantage over the United States and other western nations.
Because my left-leaning friends have never been able to provide an example, either now or at some point in the past, of a poor nation becoming a rich nation by imposing higher taxes and a bigger burden of government spending.
Yet supposed experts in economic development for decades have pushed foreign aid in failed efforts turn poor countries into rich countries.
More recently (and even more preposterously), international bureaucracies like the OECD, UN, and IMF have been arguing that higher taxes and bigger government are needed to promote economic development.
For all intents and purposes, my argument is based on the fact that western nations became rich in the 1800s and early 1900s when they had very low taxes and very small governments.
And if you don’t have 20 minutes to watch the above video, the most important charts come from a column I wrote back in 2018.
The first chart shows that there was a stunning reduction in poverty in western nations over a 100-year time period.
And the second chart shows that this near-miraculous improvement occurred before those nations had welfare states or any other forms of redistribution spending.
P.S. Rule of law (rather than arbitrary rule by kings, chiefs, emperors, and dictators) is a necessary prerequisite for growth. And weak rule of law is an even bigger challenge in the developing world than bad advice from international bureaucracies.
I support free trade for selfish reasons. I want my life to be better and I want my country to be richer.
But I also support free trade for selfless reasons. I want other people in other countries to be richer as well.
And rejecting protectionism usually is a way to achieve both my selfish and selfless goals.
But not always. Let’s look at some new evidence about the selfless benefits of open trade and globalization.
In an article for VoxEU, Maksym Chepeliev, Maryla Maliszewska, Israel Osorio Rodarte, Maria Filipa Seara e Pereira, and Dominique van der Mensbrugghe summarize their new research on global value chains.
The authors look at the economic consequences if some or all companies are told they have to rely solely on domestic suppliers (“reshoring”) compared to a world where they engage in cross-border trade.
As you can can see from this chart, you get bad results from some protectionism (reshoring leading economies) or more protectionism (reshoring all economies). Liberalization, by contrast, leads to good results.
Here’s some of what they wrote about their results.
A possible reshoring of production by the leading economies and China would have a negative impact in most regions, with real income decreasing by 1.5% worldwide. A localised world takes the biggest toll on developing countries with the Middle East and North Africa, Rest of East Asia and Pacific, and Europe and Central Asian regions being hit the most severely (Figure 1). However, countries subsidising domestic production would also be worse off as reshoring decreases trade and income, limits the variety of products available to producers and consumers, and increases prices.
If you look closely at Figure 1, you will notice that the United States and other rich nations suffer relatively small income losses from protectionism.
So this is a case where the selfish argument for free trade does not play a big role.
But the selfless argument is very strong. The authors point out that poor nations are the ones that reap big rewards with expanded trade.
Or suffer big losses in a world with more protectionism.
Under the ‘Reshoring all’ scenario, 51.8 million additional people would fall into extreme poverty by 2030, the equivalent to a 0.6% increase in the global extreme poverty headcount ratio. …The ‘GVC-friendly’ scenario, on the other hand, could lift 21.5 million people from extreme poverty by 2030. …In addition, we find that 56.2 million would graduate to global middle-class status, measured as individuals with a per capita consumption of more than PPP $10.00 a day.
Figure 4 shows that protectionism produces more extreme poverty while expanded trade saves people from that awful fate.
Second, some people argue that there are geopolitical reasons to restrict trade with misbehaving nations such as Russia and China. That certainly may be true (not my area of expertise), but such restrictions should be imposed only if the geopolitical benefits exceed the economic costs.
Also, any discussion about trade is incomplete without an acknowledgement that not everyone benefits in the short run from changing patterns of trade.
But that’s true whether the trade is between countries or within countries.
We should acknowledge that new competitors, new technologies, and new products are part of “creative destruction,” which can cause pain for some people in the short run.
To make these handouts helpful rather than harmful, aid should be conditional.
These remarks are from the Q&A section of a panel discussion in London, hosted last month by the Ayn Rand Centre, as part of the Free Market Road Show.
I was giving a spur-of-the-moment response to a question, so I want to take this opportunity to augment my answer with some hard data.
Let’s assume that American politicians do the right thing (yes, I realize that’s unrealistic) and they tell Ukraine’s politicians after the war that they can have billions of dollars to rebuild their economy, but only if they get rid of the statist policies that have been holding back the nation’s development ever since the collapse of the Soviet Empire.
As I noted in the video, this doesn’t have to be complicated. Ukraine can simply copy some of the better laws that exist in other nations.
And to make it very simple, we can even tell them they can choose from the policies of nations that are part of the European Union, which is an entity that Ukraine almost surely will want to join.
If we insist on that requirement, Ukraine instantly would become the world’s 3rd-freest country.
All of this is based on data from the Fraser Institute’s Economic Freedom of the World (by the way, apologies for mistakenly stating in the video that Ukraine was ranked #122).
Yet the crowd in Washington seem willfully blind to these problems.
For instance, in a column for today’s Washington Post, Treasury Secretary Janet Yellen and USAID Administrator Samantha Powers opine on the topic of global corruption and never even acknowledge that more government enables more corruption.
Around the world, in countries as varied as Russia, Venezuela and China, the wealthy and the well-connected launder their assets through complex networks of shell companies or transactions involving art, real estate and, occasionally, cryptocurrencies. …what links all corrupt acts is that they take resources from citizens, undermine public trust and — ultimately — threaten the progress of those who fight for democracy. …Autocrats use public wealth to maintain their grip on power, while in democracies, corruption rots free societies from within. …Moving forward, the U.S. government will require many U.S. and foreign companies to report their true owners to the Treasury and to update us when they change hands. We’re also working toward new reporting requirements for real estate transactions and will be enlisting other nations to address these issues. …the United States will deepen and expand support for those fighting kleptocrats and bad actors through a new anti-corruption response fund. …we’ve seen politicians win landslide victories by running on anti-corruption platforms. We want to support their reforms.
Rather than deal with the underlying problem of excessive government, Yellen and Powers focus on the symptom of politicians with stolen loot.
They specifically want readers to think politicians in the developing world won’t steal as much if there’s more red tape that makes it hard for them to invest their loot in the United States.
But since existing laws and regulations against money laundering have been an expensive failure, their proposals seem like a triumph of hope over experience.
If they really wanted to help poor people in the developing world, they would junk the current approach and instead use foreign aid as a reward for good policy (as measured by getting higher scores in the Economic Freedom of the World index).
But they are pursuing the opposite approach.
Mary Anastasia O’Grady of the Wall Street Journal is not impressed by how USAID has been leveraging foreign aid to promote bigger government.
Here are some excerpts from her column on how the bureaucracy is using its supposed anticorruption project as a tool to help the left take power in Guatemala.
Some Americans think of foreign aid as nothing more than money down the drain. If only. U.S. government spending in Latin America is being used by an activist bureaucracy to promote its leftist agenda. If it succeeds, U.S. taxpayers will end up subsidizing instability and economic misery. A U.S. Agency for International Development “anticorruption” forum last week is the latest example. Featured participants included former Guatemalan Attorney General Thelma Aldana and former Guatemalan prosecutor Juan Francisco Sandoval. Both are living in the U.S. and have warrants for their arrests for alleged corruption pending at home. …Rep. Norma Torres (D., Calif.), a champion of the Guatemalan left, was also a panelist at the USAID event, which brings us to the forum’s common denominator: a political agenda…to clear a path for Guatemala’s Jacobins. …Your tax dollars at work.
Needless to say, that approach doesn’t work. The best evidence is that many governments wind up in a never-ending cycle of tax-spend-debt-crisis-bailout, followed by further rounds of tax-spend-debt-crisis-bailout.
Moreover, the net effect of these policies is to divert capital from the economy’s productive sector. So it’s the economic equivalent of a lose-lose policy.
When criticizing the IMF, I usually focus on how the bureaucrats relentlessly urge higher taxes. Indeed, I often complain about how the bailouts are provided only if countries agree to raise taxes (another lose-lose situation).
Today, though, I want to write about another bad IMF policy. Earlier this year, the bureaucrats (with support from the Biden Administration) allocated $650 billion of new Special Drawing Rights (SDRs) – sort of a version of IMF-created money.
You can learn about SDRs by clicking here and here, so I won’t bore people with a description of how they work.
For purposes of our discussion, what matters is that the IMF uses SDRs to enable more government spending.
And that’s not a recipe for prosperity, either for national economies or the global economy.
Earlier this year, Mary Anastasia O’Grady of the Wall Street Journalhighlighted how SDRs are rewarding very dodgy governments in Latin America.
Nicaraguan dictator Daniel Ortega is jailing, killing and disappearing his political opponents. …At the International Monetary Fund, he’s a valued member. So too are the governments of socialist, deadbeat Argentina and of El Salvador, which every day slips further into arbitrary, authoritarian rule. These are some of the bad actors in the Western Hemisphere who received more “special drawing rights” from the IMF on Aug. 23 as part of a new $650 billion general allocation. …SDRs are created out of thin air but can be converted, on demand, into hard currency. …Treasury Secretary Janet Yellen, who led the charge for this new round of SDRs, claims the transaction is cost-free… In fact, the conversion of SDRs to dollars is a subsidized, perpetual loan. For poor countries the subsidy is above 90% of the loan value. …There was a time when large multilateral handouts were conditioned on attempts at good governance. Those days are gone.
In a column last month for the Wall Street Journal, D.J. Nordquist and Dan Katz also analyzed the impact of the IMF’s policy.
…the International Monetary Fund announced in August a new general allocation of special drawing rights equivalent to $650 billion. …All IMF members, even rogue nations, receive them, so Iran got some $5 billion and Belarus $1 billion. …The allocation added more than $17 billion to Russia’s record-high reserves…the IMF and other proponents justified the SDR allocation on grounds that its benefits outweighed the harms… But because of the IMF shareholding formula… Only 3% of the general allocation flowed to low-income countries. …the IMF publicly indicated it would collaborate with the World Bank and other international financial institutions to ensure that SDRs were put to productive uses… Unfortunately, the IMF appears to have fallen into a classic trap of international organizations: acting based on aspirations rather than binding agreements. …Public confidence in international financial institutions has been understandably shaken as a result of corruption investigations into the IMF’s emergency pandemic-relief loans, theft of World Bank assistance by elite government officials, and serious questions regarding inappropriate Chinese influence at the World Bank, the World Health Organization, and elsewhere.
I’ll close by noting that SDRs are a great deal for politicians and bureaucrats. They get more spending, all of which seems free. And since almost nobody understands how this racket works, there’s near-zero democratic accountability.
P.S. Shifting gears, here’s are some excerpts from an article on the IMF’s website. It has nothing to do with the SDR issue, but it is a window into the the IMF’s statist mindset. The bureaucracy is lauding an economist, Mariana Mazzucato, who argues for industrial policy.
Mazzucato has been stirring the pot in economics and public policy for nearly a decade. Her main message is that governments around the world need to seize their power to lead innovation for the betterment of humanity. …Government is for setting big goals, defining the missions necessary for achieving them, encouraging and investing in innovation, and governing the process so that the public benefits. …She made the case for rethinking the role of government in her 2013 book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths. …“State capacity has really been hollowed out because of the narrow way that we think about the state,” she says. …That’s particularly evident in the United Kingdom and the United States, where political leaders defunded public health and devalued government itself, eroding public trust and government’s capacity to respond to crises, she says. …Mazzucato urged “citizens’ dividends” and government equity stakes in businesses linked to government funding.
P.P.S. There are many good economists who work at the IMF and they often produce high-quality research (see here, here, here, here, here, here, here, here, here, and here). Sadly, their sensible analyses doesn’t seem to have any impact on the policy decisions of the organization’s top bureaucrats.
The obvious lesson to be learned from this example of “anti-convergence” is that market-oriented economies out-perform state-controlled economies.
I want to revisit this topic because I recently dealt with someone who claimed that government spending via the Marshall Plan deserves the credit for West Germany’s post-war economic renaissance.
What does the evidence say? Was foreign aid from the United States after World War II a key driver (for Keynesian or socialist reasons) of the West German economy.
The answer is no.
Professor David Henderson explained the role of the Marshall Plan for Econlib.
After World War II the German economy lay in shambles. …less than ten years after the war people already were talking about the German economic miracle. What caused the so-called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949. …Marshall Plan aid to West Germany was not that large. Cumulative aid from the Marshall Plan and other aid programs totaled only $2 billion through October 1954. Even in 1948 and 1949, when aid was at its peak, Marshall Plan aid was less than 5 percent of German national income. Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany.
Moreover, the money that was dumped into Germany as part of the Marshall plan was offset by money that was taken out of the country.
…while West Germany was receiving aid, it was also making reparations and restitution payments well in excess of $1 billion. Finally, and most important, the Allies charged the Germans DM7.2 billion annually ($2.4 billion) for their costs of occupying Germany.
Inconvenient facts like this make the socialism or Keynesian argument very difficult to maintain.
In a 1990 study on whether there should be something similar to the Marshall Plan for Eastern Europe, Melanie Tammen summarized some of the research on how the original plan for Western Europe was a flop.
…those that received relatively large amounts of aid per capita, such as Greece and Austria, did not recover economically until U.S. assistance was winding down. Germany, France, and Italy, on the other hand, began their recovery before receiving Marshall Plan funds. As for Belgium, it embarked on a radical monetary reform program in October 1944, only one month after liberation. Belgium’s economic stabilization and recovery were well under way by 1946, fully two years before the arrival of U.S. aid. Great Britain, conversely, received more Marshall Plan aid than any other nation but had the lowest postwar economic growth rate of any European country. The critical problem facing Europe was…simply bad economic policy.
Kai Weiss of the Austrian Economic Center in Vienna also addressed this issue. Here’s some of what he wrote for the Foundation for Economic Education.
Common knowledge says that the United States’ Marshall Plan was responsible for the rapid economic growth, rebuilding the country by throwing a lot of money at it. But that’s a mistaken view. …why was there a “Wirtschaftswunder”? …two main reasons: a monetary reform and the freeing of the economy by abolishing price controls and cutting taxes. All of this was implemented thanks to one man: Ludwig Erhard. …What Erhard did was unthinkable in a hostile environment. The Allied forces, still heavily controlling Germany, left the Nazi price controls and rationing intact. But when Erhard became Secretary of the Economy in West Germany, he quickly ended all price controls and stopped rationing — to the dismay of the US advisors. …He, not a Keynesian Project like the Marshall Plan, enabled the miracle.
Speaking of Ludwig Erhard, here’s a video clip on what he did to trigger West Germany’s prosperity.
I have one minor disagreement with that video.
It states that Germany combined “free markets with a strong welfare state.”
But the main takeaway from today’s column is that it’s even more absurd to claim that Germany’s post-war growth was because of big government.
P.S. Regarding Eastern Europe, western nations ultimately decided to create a cronyist institution, the European Bank for Reconstruction and Development, in hopes of boosting post-Soviet economies. Needless to say, that was a mistake. Many nations have enjoyed good growth after escaping communist tyranny, but the cause was good policy rather than handouts.
P.P.S. The Erhard video is an excerpt from The Commanding Heights, a must-watch video that basically tells the economic history of the 20th century).
American taxpayers have coughed up hundreds of billions of dollars in recent decades for various government-to-government handouts, and the total is far higher when you include the aid payments of other nations and the activities of international bureaucracies.
Yet rather than helping, these handouts most likely have reduced prosperity in recipient nations.
And it’s not just economists who recognize this problem. A column in the New York Times by Maria Abi-Habib explores how foreign aid has backfired for Haiti.
Almost every time Haitians think their circumstances cannot get any worse, it seems the nation takes another ominous turn, and it is now teetering on the verge of a political void… In the shadow of the richest country in the world, people wonder: How could this happen to Haiti? …Haiti’s failures have not occurred in a vacuum; they have been assisted by the international community, which has pumped $13 billion of aid into the country over the last decade. But instead of the nation-building the money was supposed to achieve, Haiti’s institutions have become further hollowed out in recent years. …the money has served as a complicating lifeline — leaving the government with few incentives to carry out the institutional reforms necessary to rebuild the country, as it bets that every time the situation worsens, international governments will open their coffers… The aid has propped up the country and its leaders… The nation-building exercises that the United States and its international partners have embarked upon in Haiti and around the world have done little to create functioning states, instead creating a system where questionable actors with little national support…are propped up.
I’m tempted to say that the headline should be changed to “Haiti Still Despairs Because of $13 Billion in Foreign Aid.”
But I’ll instead make the more modest point that the Ms. Abi-Habib is correct about Haiti needing state capacity (properly defined, of course).
But that’s just part of the solution. Haiti also needs more economic liberty.
According to the most-recent edition of Economic Freedom of the World, the country has a bad score of 6.58 on a 1-10 scale, which places it #104 out of 162 nations.
And that’s actually an exaggeration because Haiti gets a misleadingly good score (#15) for fiscal policy.
Yes, the overall level of taxes and spending is modest, but that’s not a policy choice. It’s because the government is too incompetent to administer a tax system.
The data from the most-recent edition of the Index of Economic Freedom also shows that Haiti has bad policy, with an overall score of 50.8 on a 0-100 scale, which means the country is #155 out of 178 nations
That’s not quite as bad as Venezuela, but it’s still a horrible score.
The obvious takeaway is that foreign aid is bad for taxpayers and bad for recipient nations.
I think it’s not-so-great that illegal immigration, as Walter Williams explained, makes a mockery of the rule of law.
The combination of these conflicting factors helps to explain why I rarely write on this topic.
But sometimes there are aspects of the immigration debate that are so foolish that I feel compelled to comment. And high on that list is the anti-empirical notion that foreign aid can produce more prosperity in foreign countries.
How is this connected to the immigration debate, you may be wondering?
In a column for the Washington Post, Greg Sargent writes that putting Kamala Harris in charge of immigration policy is “a big deal” because she will use foreign aid to improve Central American economies and thus discourage migration to the United States.
President Biden has assigned Vice President Harris the task of overseeing the administration’s efforts to stem the flow of migrants at the Mexican border… Here’s why this could prove to be a big deal. …it could help shift part of the conversation…and focus it on the deeper causes of these migrations. …The real challenge…entails addressing problems in Central America to reduce “push factors,” i.e., conditions that spur these migrations in the first place — such as…poverty… Which is where Harris comes in. …“A large part of her portfolio will be to develop strategies regarding root causes that generate migrants and refugees,” Sharry continued… The Biden reading of the problem is that push factors matter. …The Biden plan would invest billions in improving economic conditions, combating corruption and strengthening democracy in Central America.
Congresswoman Veronica Escobar makes the same argument in a column for the New York Times.
…the real crisis is not at the border but outside it, and that until we address that crisis, this flow of vulnerable people seeking help at our doorstep will not end anytime soon. …Overwhelmingly and consistently, Central American refugees tell stories of fleeing…calamitous economic conditions in their countries. …The good news is that we now have an administration willing to work on the issue. …reinstating aid…is a good start.
I actually agree with Congresswoman Escobar on one point. It’s true that “reinstating aid…is a good start.”
But it’s only a good start if your goal, perversely, is to undermine prosperity in poor nations.
The bottom line is that we know the recipe for growth and prosperity.
I wrote last October about how poor nations that followed the pro-market recipe of the “Washington Consensus” in the 1980s and 1990s got good results. Johan Norberg addresses the same topic in this video.
Sadly, international organizations are infamous nowadays for the bizarre argument that developing nations should try to boost prosperity by imposing higher taxes and bigger government. I’m not joking.
I was even a credentialed participant at a conference on precisely this topic at the United Nations. It was a strange experience to be surrounded by anti-empirical people, but at least I wasn’t threatened with arrest, as happened at an OECD event.
Needless to say, these folks also think it’s a good idea to use foreign aid to finance bigger fiscal burdens in poor nations.
I’ve previously explained why this is a bad idea, at least if we care about achieving more prosperity for people. Simply stated, there’s considerable evidence that foreign aid retards economic growth by subsidizing bad policy.
Today, though, let’s focus on a different adverse consequence of aid, which is that it erodes the quality of governance.
For instance, the Economist reports on some spiked research from the World Bank, which showed that foreign aid subsidizes corruption.
Their conclusion was dispiriting. World Bank payouts to 22 aid-dependent countries during 1990-2010 were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the bank’s aid to these countries. …The…working paper…passed an exacting internal review by other researchers in November. But, according to informed sources, publication was blocked by higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.
In 2019, a total of $39.2 billion was spent on foreign assistance, and at a quick glance it has left a lot to be desired. …Foreign aid is not a get-rich-quick scheme for developing countries. Instead of building wealth, it comes with some not-so-pleasant consequences for the recipient nation. …governments receiving aid no longer have to be accountable to their citizens. Knowing that US taxpayers will bail them out, some governments have no incentive whatsoever to innovate or keep corruption in check. …It is the height of naivete to believe that developing countries will magically become rich via wealth transfers from First World countries. It ignores many of the institutions of freedom—private property and federalism—that enabled countries like the US to become the most prosperous societies in human history.
Some folks may think Jose’s conclusion is too sweeping.
So let’s cite some more scholarly evidence.
Three economists, including one from the World Bank, found that foreign aid undermines democracy.
In this paper we investigate the relationship between aid and political institutions. One view of this relationship suggests that aid is needed to advance democratic institutions in developing countries. …A second view holds that foreign aid could leads politicians in power to engage in rent-seeking activities in order to appropriate these resources… By doing so political institutions are damaged because they became less democratic and less representative. Our findings support the second view. Foreign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions.
Here’s a graph from the study showing the negative relationship between aid and democracy.
The bottom line is that foreign aid doesn’t work. At least not if the goal is to improve the lives of the less fortunate.
Last century, I remember reading about the “Washington Consensus,” which was a term that was used to describe the kind of policy advice in those days provided to (or imposed upon) the developing world by the IMF, World Bank, and U.S. Treasury.
But I recall thinking that the Washington Consensus was pro-market, but nonetheless a bit timid because it did not include a plank to limit the size of government.
Wikipedia helpfully lists the 10 policies that defined this consensus.
Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
Tax reform, broadening the tax base and adopting moderate marginal tax rates;
Interest rates that are market determined and positive (but moderate) in real terms;
Competitive exchange rates;
Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
Liberalization of inward foreign direct investment;
Privatization of state enterprises;
Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
Legal security for property rights.
With the benefit of hindsight, I now want to praise the Washington Consensus.
Yes, it would be nice if there had been some focus on the size of government, but all of the advice on trade, regulation, monetary policy, and quality of governance was very sound. And those policies account for 80 percent of a nation’s grade according to Economic Freedom of the World.
Moreover, the planks on fiscal policy were good, even if they didn’t go far enough.
Additionally, it was good to have multilateral institutions such as the International Monetary Fund and World Bank using their leverage to push for pro-market reforms (unlike today, when international bureaucracies often push a statist agenda).
So what was the effect of – to use the terms of opponents – this emphasis on “neoliberalism” or “market fundamentalism”?
Well, it seems to have made a difference. Here the data from the Fraser Institute on economic freedom for all nations. As you can see, economic liberty around the world increased significantly between 1980-2000, the years when the Washington Consensus was most influential.
But did that period of pro-market reform lead to better outcomes?
The answer is a resounding yes, at least in my humble opinion.
Here’s the most persuasive evidence, showing the dramatic decline in extreme poverty.
Let’s also look at some new research from Professor William Easterly, who worked for many years as an economist at the World Bank.
He notes that many people think the Washington Consensus was a failure. So he took a fresh look at the data.
Many authors…have proclaimed the failure of a package of market-oriented reforms proposed in the 1980s and 1990s — variously known as the Washington Consensus, …globalization, or neoliberalism. This paper seeks to update the stylized facts on policies and growth that influenced this verdict. …The earlier stylized facts featured the zero or low per capita growth in the regions that were the focus of reform: Africa and Latin America. …these stylized facts have not been updated in the literature, as much more data have become available with the passage of time. …This paper will report new stylized facts. First, there has been additional and quite remarkable progress on reform outcomes since the late 1990s — this is a principal finding of this paper. Earlier judgments on the reforms often happened before the reform process was complete and/or had enough post-reform growth data to evaluate reforms. …The second stylized fact is that there is a strong correlation between improvements in policy outcomes and changes in growth outcomes. The third stylized fact is that growth has recovered in Africa and Latin America in the new millennium, and the regression of growth on policy outcomes explains a substantial part of the growth recovery. …This paper will extend the method of analyzing extremely bad and moderately bad policy outcomes to other policies, specifically — in addition to inflation — the black market premium on foreign exchange, overvaluation of the domestic currency, negative real interest rates on bank savings deposits, and abnormally low trade shares to GDP. Updating the data on these outcomes is not trivial and constitutes one of the main contributions of this paper.
And what did Prof. Easterly discover?
It turns out that the prevalence of bad outcomes has declined.
Figure 6 shows a summary measure of share of countries with any bad policy. Any bad policy is defined as having any of the moderate or extreme policy dummies set to one, with a minimum of 4 policy observations available for that country-year. The summary measure shows a downward trend in bad policy outcomes worldwide, in Latin America, and in Sub-Saharan Africa. The sharpest break is around the mid-1990s, somewhat after the formulation of the Washington Consensus and the first negative reactions it received.
Here’s the aforementioned Figure 6.
And he also looks at the prevalence of extremely bad poliicy.
Figure 7 shows a similar graph to Figure 6, but now limited to extremely bad policy outcomes. It shows if any of the extremely bad policy dummies is set to one, for the sample with a minimum of at least two out of five policy outcomes available. The decline in the prevalence of any extreme policy is even more dramatic beginning in the early 1990s, going from surprisingly common (above 35 percent of countries up to the early 1990s) to almost non-existent for the world. The same pattern is even more striking for Africa and for Latin America.
Here’s Figure 7.
Most important, these better outcomes also are associated with stronger growth.
This paper showed these changes in policy outcomes – especially away from extreme policies — were accompanied by growth increases. It documented that the policy reforms can explain the growth increases in the regions most emphasized earlier – Africa and Latin America. We have seen that the old data available through 1998 was indeed consistent with the reform pessimism, partly because of weaker results on growth payoffs associated with reform outcomes and partly because less reform had happened.
Prof. Easterly acknowledges that there are still many issues to investigate and that his research is just one slice at a big pie.
But the bottom line is that we now have some good evidence that the Washington Consensus led to better results. Simply stated, capitalism produces more growth and less poverty. Too bad the IMF and other international bureaucracies have forgotten this lesson.
Yet some people haven’t learned this lesson. Consider the current debate over Trump’s threat to end aid to Central America if illegal immigration isn’t reduced.
A column in Fortune makes the case that handouts to Central America are necessary to reduce human smuggling.
President Donald Trump ordered the State Department to cut funding for Guatemala, Honduras, and El Salvador this weekend in retaliation for the recent influx of migrants from these nations, reversing a longstanding policy that says aid helps abate immigration. …According to Liz Schrayer, president and CEO of the U.S. Global Leadership Coalition—a nonprofit coalition of businesses and NGOs dedicated to American development and diplomacy—pulling back aid “exasperates the exact root causes that are creating the migration numbers’ increase.” …“It will only result in more children and families being forced to make the dangerous journey north to the U.S.-Mexico border,” said the five Democratic lawmakers in a statement.
A piece in the New York Times makes the same argument.
The Trump administration’s decision to cut off aid to El Salvador, Guatemala and Honduras to punish their governments for failing to curb migration is a rash response to a real policy dilemma. …it will exacerbate migration from the region without twisting Central American politicians’ arms. …The decision to cut off aid is bound to drive up migration numbers.
Ironically, the author admits that aid is ineffective.
…we shouldn’t pretend that the aid itself was doing much good… it is mostly distributed inefficiently in large blocks by foreign contractors.
Central American governments and elites have gotten away with abdicating their fiduciary, social and legal responsibilities to their citizens. They have failed to collect tax revenue and to invest in social programs and job creation that alleviate the plight of their poor.
Even some small-government conservatives seem to think that more aid would make recipient nations more prosperous and thus reduce illegal immigration.
What President Trump is doing now — cutting aid — is wrong. …As former White House Chief of Staff and SOUTHCOM Commander, General John Kelly, has noted, “If we can improve the conditions, the lot in life of Hondurans, Guatemalans, Central Americans, we can do an awful lot to protect the southwest border.” …We risk undermining our longterm national interests by cutting foreign aid. We should, instead, spend it wisely in those countries to ensure stable governments that view us as allies and work with them to root out crime, corruption, and cartels. The present policy to cut foreign aid cuts off our national nose to spite our face.
This is not an impossible prescription.
But it’s also the triumph of hope over experience.
In the real world, we have mountains of evidence that foreign aid weakens recipient economies by subsidizing corruption and larger burdens of government.
Let’s look at some analysis on this issue.
In a piece published by CapX, Matt Warner recommends less redistribution rather than more.
…the poor know how to get themselves out of poverty. They just need more opportunity to do it. The question we must ask ourselves is: to what degree are our current development aid strategies aligned with this insight? …If the intervention itself is part of the problem, what can outsiders really do to help? Today there are at least 481 research and advocacy organisations in 92 countries pushing reform agendas to provide more economic opportunity and prosperity for all. The “Doing Business” report provides a blueprint for change. Local reform organisations, supported by private philanthropy, provide the leadership to achieve it and the world’s poor will show us their own paths to prosperity if we will all just learn to get out of their way.
Writing for Barron’s, Paul Theroux notes that Africa regressed when it was showered with aid.
Africa receives roughly $50 billion in aid annually from foreign governments, and perhaps $13 billion more from private philanthropic institutions… Africa is much worse off than when I first went there 50 years ago to teach English: poorer, sicker, less educated, and more badly governed. It seems that much of the aid has made things worse. …Zambian-born economist Dambisa Moyo calls aid a “debilitating drug,” arguing that “real per-capita income [in Africa] today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades.” The Kenyan economist James Shikwati takes this same line on aid, famously telling the German magazine Der Spiegel, “For God’s sake, please stop.”
Brad Lips of the Atlas Network explains why aid often is counterproductive.
The international community has donated more than $1.8 trillion to poor countries since 2000 – but this development aid hasn’t lifted many people out of poverty. Arguably, it has made some recipient nations poorer. …the aid has bred corruption, fostered dependence and impeded reforms that deliver sustainable economic growth. …Between 1970 and 2000 – a period in which aid to Africa skyrocketed – annual gross domestic product growth per capita on the continent fell from about 2 percent to zero growth, according to a study by an economist at New York University.
A column in the U.K.-based Times is very blunt about what all this means.
…the international development secretary should have abolished her department as soon as she was appointed to it… We kid ourselves that this aid works, to salve our consciences about being better off. But as we know, the money benefits charities, quangos, bureaucrats, tyrants and the predatory elite, and all these years later your average African is no better off.
Let’s close by looking at a thorough 2005 study from the International Policy Network. Authored by Fredrik Erixon, it documents the failure of foreign aid.
…the ‘gap theory’…assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that this savings/investment ‘gap’ exists in practice. As a result, aid has failed to ‘fill the gap’. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty. …The reason countries are poor is…because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government. … many studies point to the fact that government consumption in SubSaharan Africa has increased when aid has increased.
Here’s the evidence showing has more development assistance is associated with weaker economic performance.
By the way, the International Monetary Fund deserves unrestrained scorn for recommending higher tax burdens on Africans, thus making economic growth even harder to achieve.
Now let’s look at how two Asian regions have enjoyed growth as aid lessened.
Last but not least, here’s some very encouraging data from Africa.
I already mentioned that Botswana is an exception to the rule. As you can see, that nation’s success is definitely not the result of more handouts.
The bottom line is that President Trump is right, even if his motives are misguided.
But I’m increasingly displeased by the European Bank for Reconstruction and Development, which is another international bureaucracy (like the OECD and IMF) that is backed by American taxpayers.
And what does it do with our money? As I explained earlier this month in this short speech to the European Resource Bank in Prague, the EBRD undermines growth with cronyist policies that distort the allocation of capital.
In some sense, the argument against the EBRD is no different than the standard argument against foreign aid. Simply stated, you don’t generate growth by having the government of a rich nation give money to the government of a poor nation.
Poor nations instead need to adopt good policy – something that’s less likely when profligate and corrupt governments in the developing world are propped up by handouts.
That being said, the downsides of the EBRD go well beyond the normal problems of foreign aid.
I recently authored a study on this bureaucracy for the Center for Freedom and Prosperity.
Here are some of the main findings.
The EBRD was created with the best of intentions. The collapse of communism was an unprecedented and largely unexpected event, and policymakers wanted to encourage and facilitate a shift to markets and democracy. …But good intentions don’t necessarily mean good results. Especially when the core premise was that growth somehow would be stimulated and enabled by the creation of another multilateral government bureaucracy. …Unfortunately, even though its founding documents pay homage to markets…, there’s nothing in the track record of the EBRD that indicates it has learned from pro-intervention and pro-statism mistakes made by older international aid organizations. Indeed, there’s no positive track record whatsoever.
• There is no evidence that nations receiving subsidies and other forms of assistance grow faster than similar nations that don’t get aid from the EBRD.
• There is no evidence that nations receiving subsidies and other forms of assistance enjoy more job creation than similar nations that don’t get aid from the EBRD,
• There is no evidence that nations receiving subsidies and other forms of assistance have better social outcomes than similar nations that don’t get aid from the EBRD.
I also delved into three specific downsides of the EBRD, starting with its role in misallocating capital.
In a normal economy, savers, investors, intermediaries, entrepreneurs, and others make decisions on what projects get funded and what businesses attract investment. These private-sector participants have “skin in the game” and relentlessly seek to balance risk and reward. Wise decisions are rewarded by profit, which often is a signal for additional investment to help satisfy consumer desires. There’s also an incentive to quickly disengage from failing projects and investments that don’t produce goods and services valued by consumers. Profit and loss are an effective feedback mechanism to ensure that resources are constantly being reshuffled in ways that produce the most prosperity for people. The EBRD interferes with that process. Every euro it allocates necessarily diverts capital from more optimal uses.
I explain why taxpayers shouldn’t be subsidizing cronyism.
…the EBRD is in the business of “picking winners and losers.” This means that intervention by the bureaucracy necessarily distorts competitive markets. Any firm that gets money from the EBRD is going to have a significant advantage over rival companies. Preferential financing for hand-picked firms from the EBRD also is a way of deterring new companies from getting started since there is not a level playing field or honest competition. … cronyism is a threat to prosperity. It means the playing field is unlevel and that those with political connections have an unfair advantage over those who compete fairly. To make matters worse, nations that receive funds from the ERBD already get dismal scores from Economic Freedom of the World for the two subcategories (“government enterprises and investment” and “business regulations”) that presumably are the best proxies for cronyism.
Here’s a chart from the study showing that recipient nations already get low scores from Economic Freedom of the World for variables that reflect the degree of cronyism in an economy.
Last but not least, I warn that the EBRD enables and facilitates corruption.
When governments have power to arbitrarily disburse large sums of money, that is a recipe for unsavory behavior. For all intents and purposes, the practice of cronyism is a prerequisite for corruption. The EBRD openly brags about the money it steers to private hands, so is it any surprise that people will engage in dodgy behavior in order to turn those public funds into private loot? …Recipient nations get comparatively poor scores for “legal system and property rights” from Economic Freedom of the World. They also do relatively poorly when looking at the World Bank’s “governance indicators.” And they also have disappointing numbers from Transparency International’s “corruption perceptions index.” So, it’s no surprise that monies ostensibly disbursed for the purpose of development assistance wind up lining the pockets of corrupt insiders. For all intents and purposes, the EBRD and other dispensers of aid enable and sustain patterns of corruption.
And here’s the chart showing that recipient nations have poor quality of governance, which means that EBRD funds are especially likely to get misused.
I also cite several EBRD documents that illustrates the bureaucracy’s hostility for free markets and limited government.
Just in case you didn’t want to watch the entire video, here’s the relevant slide from my presentation.
And remember that your tax dollars back this European bureaucracy. Indeed, American taxpayers have a larger exposure than any of the European countries.
P.S. I’m also not a fan of the United Nations, though I take comfort in the fact that the UN is not very effective in pushing statist policy.
P.P.S. I’m most tolerant of the World Bank, though that bureaucracy periodically does foolish things as well.
President Trump’s new budget is getting attacked by politicians and interest groups in Washington. These critics say the budget cuts are too severe and draconian.
My main reaction is to wonder whether these people are illiterate and/or innumerate. After all, even a cursory examination of Trump’s proposal shows that the federal government will expand over the next decade by an average of 3.46 percent every year, considerably faster than inflation.
For what it’s worth, I’m sure most of the critics actually do understand that government will continue growing under Trump’s budget. But they find it politically advantageous to engage in “Washington math,” which is when you get to claim a program is being cut if it doesn’t get a sufficiently large increase. I’m not joking.
That being said, while the overall federal budget will get bigger, there are some very good proposals in the President’s budget to terminate or reduce a few specific programs. I don’t know if the White House is actually serious about any of these ideas, but some of them are very desirable.
Shutting down the wasteful National Endowment for the Arts.
Defunding National Public Radio and the Corporation for Public Broadcasting.
Terminating the scandal-plagued Community Development Block Grant program.
Block-granting Medicaid and reducing central government funding and control.
Today, let’s add a fifth idea to our list. The Trump budget proposes a substantial reduction in foreign aid (for numbers, see line 18 of this OMB excel file).
I hope these cuts are implemented.
In part, I want to save money for American taxpayers, but I’m even more motivated by a desire to help the rest of the world. Simply stated, foreign aid is counterproductive.
The great paradox of government-to-government aid transfers is that they won’t work if recipient nations have bad policy. Yet we also know that nations with good policy don’t need handouts.
My colleague at the Cato Institute, Marian Tupy, embraces the idea of less foreign aid in a Reasoncolumn.
President Donald Trump is said to be considering large cuts to foreign aid. Those cuts cannot come soon enough.
And he explains why in the article. Here’s the passage that caught my eye.
Graham Hancock’s 1994 book, The Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business, is still worth reading. As the author explains, much of foreign aid is used to subsidize opulent lifestyles within the aid establishment. “Only a small portion of [aid money],” Hancock writes, “is ever translated into direct assistance. Thanks to bureaucratic inefficiency, misguided policies, large executive salaries, political corruption, and the self-perpetuating ‘overhead’ of the administrative agencies, much of this tremendous wealth is frittered away.”
The problems are not specific to the United States. Foreign aid also is used as a scam to line the pockets of contractors in the United Kingdom.
The British aid contracting industry has more than doubled in value from £540 million in 2012 to £1.34 billion last year. The proportion of every pound of taxpayers’ aid money that is spent on consultants has risen from 12p in 2011 to 22p. …Budget breakdowns showed the public being charged twice the going rate for workers. One contractor on a project had a margin of 141 per cent between staffing costs charged to Dfid and the cost at market rates.
By the way, one study even found that foreign aid undermines democracy.
Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. …Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect.
Last but not least, Professor William Easterly explains in the Washington Post that foreign aid does not fight terrorism.
President Trump’s proposed budget includes steep cuts in foreign assistance. Aid proponents such as Bill Gates are eloquently fighting back. …The counter-terrorism argument for foreign aid after 9/11 indeed succeeded for a long time at increasing and then sustaining the U.S. foreign aid budget. …the link from aid to counter-terrorism never had any evidence behind it. As it became ever less plausible as terrorism continued, it set up aid for a fall. …the evidence for a link from poverty to terrorism never showed up. …studies since 9/11 have consistently shown that terrorists tend to have above-average income and education. Even if there had been a link from poverty to terrorism, the “aid as counter-terrorism” argument also required the assumption that aid has a dramatic effect on the poverty of entire aid-receiving nations. Today’s proponents of aid no longer make the grandiose claims of aid lifting whole societies out of poverty.
Heck, foreign aid keeps societies in poverty by enabling bigger government.
Yet international bureaucracies such as the United Nations keep peddling the discredited notion that developing nations should have more money to finance ever-bigger government.
The bottom line is that people who care about the world’s poor people should be advocating for freedom rather than handouts.
P.S. If you’re still skeptical, I invite you to try to come up with an example that answers either of these two questions.
While President Trump apparently intends to waste taxpayer money for more childcare subsidies and presumably is going to duck the critical issue of entitlement reform, there is some good news for advocates of limited government and fiscal responsibility. According a recent news report., he’s not a big fan of outlays for foreign aid.
The White House budget director confirmed Saturday that the Trump administration will propose “fairly dramatic reductions” in the U.S. foreign aid budget later this month. …news outlets reported earlier this week that the administration plans to propose to Congress cuts in the budgets for the U.S. State Department and Agency for International Development by about one third. …The United States spends just over $50 billion annually on the State Department and USAID.
Trump’s skepticism of foreign aid is highly appropriate. Indeed, he’s probably being too soft on the budget for foreign aid.
Government-to-government handouts have a terrible track record. Indeed, the main impact of such transfers is to undermine good reform and enrich corrupt elites in poor nations.
Moreover, if the goal is to actually create prosperity in developing countries, there is no substitute for free markets and limited government.
Let’s look at some additional evidence about the harmful impact of aid.
We’ll start with a rather amazing admission from a 2016 study published by the International Monetary Fund.
Foreign aid is a sizable source of government financing for several developing countries and its allocation matters for the conduct of fiscal policy. This paper revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010. …we show that upward shifts and downward shifts in aid dependency have asymmetric effects on the fiscal accounts. Large aid inflows undermine tax capacity and public investment while large reductions in aid inflows tend to keep recipients’ tax and expenditure ratios unchanged. …we find that the undesirable fiscal effects of aid are more pronounced in countries with low governance scores and low absorptive capacity, as well as those with IMF-supported programs.
Wow, I’m not a big fan of the IMF, but you have to give the authors credit for honesty. They admit that aid is especially harmful in nations that are also receiving IMF bailouts.
But the main takeaway is that foreign governments simply use foreign aid money as an excuse to raise and spend their own money. That outcome presumably should irk leftists. From my perspective, such nations have too much spending, regardless of whether it’s being financed by their own taxpayers or foreign taxpayers.
Instead, these nations should be copying the small-government policies that enabled western nations to move from agricultural poverty to middle class prosperity.
Let’s consider a couple of real-world examples.
We’ll start in South Sudan, where aid has subsidized awful behavior. Ian Birrell explains in an article for CapX.
…the fledgling state stumbles from the savagery of civil war into the horror of famine. …sadly these events also illustrate another example of the dismal failure of Western aid policies. …our politicians would be wise to stop spouting their usual nonsense about saving the world’s poor and start considering the corrosion caused by the billions already poured in to this failed state, pursuing naive ideas about state building based on floods of cash. …Experts such as the academic Alex de Waal say “looting food aid was elevated to military strategy” by militia commanders who later controlled the country. Despite these activities, $1 billion a year was handed over in aid in the years before independence, rising to $1.4 billion following arrival as the 193rd nation represented at the UN. …An estimated $4 billion was missing “or simply put, stolen”… But still aid poured in, leading to public spending per capita more than three times the levels seen in neighbouring Kenya. …there was a fake ministry of finance to deal with gullible donors and well-meaning armies of advisers, while the real version carried on under the generals with its backdoor dealings. …For all the fine words and good intentions, the West has ended up assisting and empowering a callous kleptocracy – again.
The bottom line is that foreign aid enabled and subsidized an awful government doing awful things.
Now let’s look at another African jurisdiction, only this one has been neglected by the international community.
But as Negash Tekie explains in another article of CapX, benign neglect can be a positive thing.
Over the years, the West has spent many millions to help stabilise the Horn of Africa, and alleviate the grinding poverty of many of its residents. …In Somalia, meanwhile, the international community is still trying – as it has for decades – to build a functioning government. Yet despite massive amounts in aid, …there is little hope of either building resilient and inclusive state institutions. What a stark contrast there is with neighbouring Somaliland. …Somaliland is, admittedly, desperately poor… But it is, in a volatile region, a beacon of security and stability. …Somaliland…claimed its independence from Somalia in May 1991, amid the chaos of the civil war there. But international bodies, and the African Union, have refused to recognise it.
But this absence of recognition has been a blessing in disguise.
The result has been that, without international aid and support, Somaliland has had to fall back on its own resources. In contrast to other African nations, state-building programmes and public services have been entirely financed by domestic income, rather than being supported by international donors. …countries that are dependent on aid can afford to neglect tax collection, countries without it are forced to use taxation appropriately. In 1990-2000, the Somaliland ministry of finance reported that “95 per cent of the resource that finance the activities are locally mobilised, mostly through taxation”. Not only are taxes collected in a non-coercive manner… For example, in early 2000s the government attempted to increase taxes on the private sector and proposed a VAT rate of 30 per cent, but the business sector lobbied against it and the policy was reversed. …A number of aid experts have argued that heavy dependence on external assistance undermines democracy, creates a dependency culture, diminishes political accountability and makes the state more accountable to donors than its own citizens.Somaliland is an example that…the inhabitants of the Horn of Africa can still build functioning states. …Somaliland is a lesson to the world in how to achieve successful state-building without aid.
Somaliland is far from a success story, and the article acknowledges big problems with drought, Chinese influence, and other factors, but at least there are some positive developments.
The key lesson is that the absence of aid has a very sobering effect.
So I’m crossing my fingers that Somaliland stays independent and begins to prosper.
Let’s close by sharing a startling confession by a former senior aid bureaucrat in the United Kingdom.
Foreign aid spending is “out of control” and the department responsible for it should be abolished, according to its own former minister of state. …Grant Shapps, who was second-in-command at the Department for International Development (DfID) until 14 months ago, attacked its “profoundly worrying” tendency to “shovel cash out of the door”. …Shapps, whose criticisms are unprecedented from a former insider, said he had “agonised” for more than a year about going public. …He described how, in the Foreign Office, he would protest to African dictators about their “denial of human rights and democratic values” but “then, with my DfID hat on, I would rifle through my red box [of ministerial papers] to find cheques for hundreds of millions of pounds payable to the same countries. …Money was thrown at wasteful multilateral aid providers, such as the European Union and the United Nations, to reach the required spending level.
Too bad we don’t have enough ethical bureaucrats to blow the whistle on similar examples of waste and corruption in America’s foreign-aid system (though at least we have two former officials who were in charge of the federal government’s asset-forfeiture office and now say it should be shut down).
P.S. Next time leftists want to make a satirical video attacking libertarianism, they should use Somaliland rather than Somalia.
But don’t believe me. Professor William Easterly of NYU spent many years at the World Bank working on issues relating to economic development and he’s written entire books on the failure of foreign aid.
And here’s some of what he wrote for Cato back in 2006.
The West’s efforts…have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. …Economic development happens, not through aid, but through the homegrown efforts of entrepreneurs and social and political reformers. While the West was agonizing over a few tens of billion dollars in aid, the citizens of India and China raised their own incomes by $715 billion by their own efforts in free markets.
…government-to-government aid distorts the international division of labour. It comes in the way of the natural laws of the market which should decide which country should produce what. …Government-to-government loans encourage socialism, communism and Statism, concentration of power, and waste. When a government aids another government, who disburses that aid? The government of that country. Aid thus transfers economic power from the people, the industrialists, the businessmen and the people to the hands of bureaucrats and politicians. The patronage the politician can dispense increases; the politicisation of economic life goes on. So, in a very direct way, every rupee of aid given by America or any other country or the World Bank to any aided country, including India, directly strengthens the forces of Statism, socialism and communism and weakens the forces of people’s free enterprise. It also breeds irresponsibility and waste.
He makes a great point that it is private investment that produces sustainable growth, not government-to-government transfers.
…one of the greatest disadvantages of government-to-government aid is that it discourages the investment of private equity capital in these countries. It does so because when one gets government-to-government aid at cheap rates, the temptation is not to raise equity capital abroad. This is a pity because our countries need foreign equity capital desperately. When foreign capital comes into India from any part of the world, it brings in foreign plant or machinery and engages Indian labour to work on it. It takes its profits out of the country only when it makes a profit. So such investment is in the interests of the Indian people. When a government-to-government loan comes, we have to repay the capital and the interest to the foreign government, however badly the money may have been wasted by our government. This is against the interests of the Indian people. So foreign private equity capital is good for India; government-to-government loans are bad for India. Let us hope we shall be spared them from now on.
Let’s look at some real-world evidence from the modern era.
In her recent Wall Street Journalcolumn, Mary Anastasia O’Grady explains how aid has stifled the private sector in Haiti.
…why are so many Haitians still living in such dire poverty in the 21st century? Paradoxically, the answer may be tied to the way in which humanitarian aid, necessary and welcome in an emergency, easily morphs into permanent charity, which undermines local markets and spawns dependency. …The trouble is their assumption, too often, that poverty is caused by a lack of money or resources. This produces the wrong solution, one that prescribes getting as much free stuff to the target economy as possible. …The country has also been the recipient of billions of dollars in foreign-government bilateral and multilateral aid over the last quarter century. This enormous giving has created harmful distortions in the local economy because when what would otherwise be traded or produced by Haitians is given away, it drives entrepreneurs out of business.
Mary shares a couple of concrete examples.
The country was once self-sufficient in rice thanks to the work of rural peasants. That changed, according to the testimony of one development expert in the film, in the early 1980s. That’s when Haiti opened its rice market and the U.S. began dumping subsidized grain in the country with the goal of ending hunger—and helping Arkansas rice growers with U.S. taxpayer money. Most Haitian farmers could not compete with Uncle Sam’s generosity, and they lost their customers. …Donations of bottled water, clothing, shoes and even solar panels destroy local businesses in the same way. Just ask Jean-Ronel Noel, who co-founded the solar-panel company Enersa in his garage in the mid-2000s and expanded it to more than 60 employees. He is proud of his workforce…comes mainly from Port-au-Prince’s notorious slums. …The company was doing a robust business until the 2010 earthquake. “After the earthquake we were competing mostly against NGOs . . . coming with their solar panels . . . and giving them away for free. So what about local businessmen?” As Alex Georges, Mr. Noel’s partner puts it, “The demand stopped because it’s hard to compete with free.”
And here is the problem from a national and cultural perspective.
Mr. Noel zeroes in on another related problem: “Those NGOs are changing the mentality of the people. Now you have a generation with a dependency mentality.”
In other words, handouts from rich nations are destroying the social capital of Haiti.
Let’s go back to 2009 and see what Dambisa Moyo wrote about foreign aid to her home continent.
Kibera, the largest slum in Africa…is…just a few yards from…the headquarters of the United Nations’ agency for human settlements… Kibera festers in Kenya, a country that has one of the highest ratios of development workers per capita. …Giving alms to Africa remains one of the biggest ideas of our time — millions march for it, governments are judged by it, celebrities proselytize the need for it. Calls for more aid to Africa are growing louder, with advocates pushing for doubling the roughly $50 billion of international assistance that already goes to Africa each year. Yet evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It’s increased the risk of civil conflict and unrest… Aid is an unmitigated political, economic and humanitarian disaster.
She has some very grim numbers.
…aid can provide band-aid solutions to alleviate immediate suffering, but by its very nature cannot be the platform for long-term sustainable growth. …Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades. …The most obvious criticism of aid is its links to rampant corruption. Aid flows destined to help the average African end up supporting bloated bureaucracies in the form of the poor-country governments and donor-funded non-governmental organizations. …A constant stream of “free” money is a perfect way to keep an inefficient or simply bad government in power.
If foreign aid money was “merely” wasted, that would be a bad outcome.
But that’s the optimistic version of the story.
In reality, the evidence suggests that these handouts actually subsidize bad policy in the developing world.
None of this would surprise the late Peter Bauer.
Lord Bauer was famous for observing that “government-to-government transfers . . . are an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”
That’s good, if you happen to be a third world kleptocrat and you have a nice bank account filled with stolen funds in New York.
But if you’re a poor person in a poor country, you’re the one victimized by a bigger government that’s riddled with more corruption.
Amazingly, many western politicians accept corruption as the price of giving away money.
But this brings me back to where we started. If foreign aid achieved good results, then there would be a utilitarian case for accepting a degree of waste and corruption.
But since the evidence shows that these programs lead to slower growth and less prosperity, it’s a lose-lose-lose situation.
Here’s a video trailer for a great documentary on how foreign aid is helpful, but only for the people in charge of the programs.
Let’s close with something that probably should be called Bauer’s Paradox since I’m almost sure he said something making this point.
But until I find proof (maybe it was Easterly or some other scholar), we won’t attribute this sentiment to anyone in particular. We’ll simply go with a rather anodyne title.
But even if the title is boring, this Paradox makes a critical point. The poor nations that have become rich nations in recent decades did not rely on handouts and redistribution.
The nations that got the most aid, however, have stayed relatively poor.
P.S. The foreign aid bureaucrats and contractors have been the only real beneficiaries, much as the “poverty pimps” are the only real beneficiaries of the failed War on Poverty.
There are many reasons why I’m not a big fan of the United Nations. Like other international bureaucracies, it supports statist policies (higher taxes, gun control, regulation, etc) that hinder economic development and limit human liberty by increasing the burden of government
Some people tell me that I shouldn’t be too critical because the U.N. also helps poor people with foreign aid. Indeed, the U.N. has a very active project to encourage rich nations to contribute 0.7 percent of their economic output to developing nations.
I generally respond to these (in some cases) well-meaning folks by explaining that there’s a big difference between good intentions and good results. If you examine the evidence, it turns out that redistribution from rich nations to poor nations is just as counterproductive as redistribution within a society.
An article in The Economist succinctly summarizes the issue. It starts with the rationale for foreign aid.
After the second world war, a new “development economics” came to dominate policymaking…, often at the urging of international institutions such as the World Bank. It argued that poor countries were victims of a vicious circle of poverty… The answer? Rich countries should provide the capital, in the form of foreign aid. …poor-country governments should plan their economies and…competition should be restricted through monopoly rights and barriers to foreign trade.
It then describes the revolutionary thinking of the late Peter Thomas Bauer, a Hungarian-born British economist who said the developing world needed economic freedom rather than handouts.
Lord Bauer set out alternative theories that, from the 1950s to the 1970s, were heresy. …Opportunities for private profit, not government plans, held the key to development. Governments had the limited though crucial role of protecting property rights, enforcing contracts, treating everybody equally before the law, minimising inflation and keeping taxes low.
Moreover, Bauer explained that foreign aid generally had a negative effect because it put resources in the hands of government, thus leveraging more statism. Which is the last thing these nations needed.
Aid politicised economies, directing money into the hands of governments rather than towards profitable business. Interest groups then fought to control this money rather than engage in productive activity. Aid increased the patronage and power of the recipient governments, which often pursued policies that stifled entrepreneurship and market forces. Indeed, aid had proved “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”
Writing for the U.K.-based Spectator, Daron Acemoglu and James Robinson explain that foreign aid has a very poor track record.
The idea that large donations can remedy poverty has dominated the theory of economic development — and the thinking in many international aid agencies and governments — since the 1950s. And how have the results been? Not so good, actually. Millions have moved out of abject poverty around the world over the past six decades, but that has had little to do with foreign aid. Rather, it is due to economic growth in countries in Asia which received little aid.
Meanwhile, the nations getting the most handouts have remained mired in poverty.
In the meantime, more than a quarter of the countries in sub-Saharan Africa are poorer now than in 1960 — with no sign that foreign aid, however substantive, will end poverty there. …huge aid flows appear to have done little to change the development trajectories of poor countries… Why? …economic institutions that systematically block the incentives and opportunities of poor people to make things better for themselves, their neighbours and their country. …The problem is that their aspirations are blocked today…by extractive institutions. The poor don’t pull themselves out of poverty, because the basic ability to do so is denied them.
What exactly are “extractive institutions”?
At the top of the list would be bad government policy, which creates a system in which politicians, bureaucrats, and insiders get unearned wealth via corruption and cronyism.
The authors give some powerful examples.
To understand Syria’s enduring poverty, you could do worse than start with the richest man in Syria, Rami Makhlouf. He is the cousin of President Bashar al-Assad and controls a series of government-created monopolies. He is an example of what are known in Syria as ‘abna al-sulta’, ‘sons of power’. To understand Angola’s endemic poverty, consider its richest woman, Isabel dos Santos, billionaire daughter of the long-serving president. …every major Angolan investment held by dos Santos stems either from taking a chunk of a company that wants to do business in the country or from a stroke of the president’s pen that cut her into the action.
To be sure, we have examples of insider favoritism and undeserved wealth in rich nations, but it’s a matter of degree. Cronyism is an undesirable feature of our economy, but it’s a defining feature of nations in the developing world.
So what does all this mean?
Acemoglu and Robinson basically reach the same conclusion as Lord Bauer.
When aid is given to governments that preside over extractive institutions, it can be at best irrelevant, at worst downright counter-productive. …Many kleptocratic dictators such as Congo’s Mobutu Sese Seko have been propped up by foreign aid.
Now let’s shift from looking at nations where failure has been subsidized by foreign aid and instead consider the success stories of economic development. Are there any lessons we can learn?
Well, if you look at the ranking from Economic Freedom of the World, you’ll see that the formerly poor East Asian jurisdictions that are now rich also have something else in common. They rank very high or somewhat high for economic freedom
In other words, there is a recipe for growth and prosperity. Nations that restrain the size of government and allow markets to flourish enjoy growth.
Yes, both nations are capable of much stronger growth with further improvements in policy, but it’s nonetheless good news that there’s been considerable improvement.
Let’s address one more issue that arises in the debate about foreign aid.
Professor Noah Smith of Stony Brook University, in a column for Bloomberg, debunks the myth that poverty in the developing world is a legacy of colonialism.
…the stolen-wealth theory is wrong. Oh, it’s absolutely true that colonial powers stole natural resources from the lands they conquered. …the stolen-wealth theory is wrong…because the theory doesn’t explain the global distribution of income today. …The easiest way to see this is to observe all the rich countries that never had the chance to plunder colonies. Germany, Italy, Sweden, Denmark and Japan had colonial empires for only the very briefest of moments, and their greatest eras of development came before and after those colonial episodes. Switzerland, Finland, and Austria never had colonies. And South Korea, Taiwan, Singapore and Hong Kong were themselves colonies of other powers. Yet today they are very rich. They did it not by theft, but by working hard, being creative, and having good institutions.
Amen. And notice that he also mentions the tiger economies of East Asia.
P.S. Given what I wrote the other day about the statist proclivities of the OECD, here’s an item that shouldn’t surprise anyone.
Even though South Africa already has an excessive burden of government, the Paris-based bureaucracy wants that nation to impose even higher taxes to fund even bigger government.
…considerable revenues will be needed in the years ahead to expand social spending and infrastructure in order to raise growth and well-being. …there is some scope to raise further revenue, particularly through broadening the base of these taxes further. …An important additional source of revenue is environmentally related taxes.
Yup, you read correctly. The bureaucrats at the OECD want people to believe that South Africa’s main challenge is that government isn’t big enough. Heck, they actually want readers to believe that a more bloated public sector will “raise growth and well-being”.
What’s especially remarkable about the OECD’s anti-empirical approach is that fiscal policy is where South Africa get its lowest score in Economic Freedom of the World. It’s almost as if the tax-loving bureaucrats at the OECD are trying to keep that country from prospering.
Since I’m an advocate of smaller government, you might imagine I’m perpetually depressed. After all, I work in Washington where I’m vastly outnumbered by people who specialize in looting and mooching. At times, I feel like a missionary in a house of ill repute.
But I always look for the silver lining when there’s a dark cloud overhead. So while it’s true that government squanders our money and violates our rights, at least we sometimes get some semi-amusing stories about sheer incompetence and staggering stupidity.
Like Detroit spending $32 to issue $30 parking tickets.
Yes, I realize I also should be outraged about these examples. But I can’t help being amused as well.
So let’s add to our collection of bizarre, foolish, and wasteful behavior by government.
Here are some passages from a Washington Post exposé on mismanagement and waste at the federal department that is infamous for secret waiting lists that resulted in denied health care (and in some cases needless deaths) for America’s veterans.
The Department of Veterans Affairs has been spending at least $6 billion a year in violation of federal contracting rules to pay for medical care and supplies, wasting taxpayer money and putting veterans at risk, according to an internal memo written by the agency’s senior official for procurement. In a 35-page document addressed to VA Secretary Robert McDonald, the official accuses other agency leaders of “gross mismanagement” and making a “mockery” of federal acquisition laws that require competitive bidding and proper contracts. Jan R. Frye, deputy assistant secretary for acquisition and logistics, describes a culture of “lawlessness and chaos” at the Veterans Health Administration.
I confess that it’s hard to find anything amusing about this story, but I’m worried that I might go crazy if I simply focus on how a bureaucracy gets more and more money every year, yet also manages to waste money with no negative consequences.
Or maybe I just enjoy the fact that I have a new reason to mock a wasteful government department (sorry to be redundant).
Here’s an example of spending that is so silly that it’s okay for all of us to laugh. Enjoy this blurb on how tax dollars are being wasted by the foreign aid bureaucracy.
American taxpayers might come down with a case of the blues when they hear about how the State Department is spending their tax dollars. According to ForeignAssistance.gov, India has requested $88,439,000 in U.S. foreign aid for the year 2015, but the State Department plans to spend additional funds on diplomacy: music diplomacy. The U.S. Mission to India is offering a $100,000 grant opportunity titled “Strengthening US-India Relations Through Jazz.” Eligible applicants include public and private universities as well as non-profit organizations. …Another grant available to universities and non-profit groups is for a “Visual Exhibit on Indian Faith and Traditions in America.” For $75,000, U.S. taxpayers will fund a “photographic exhibit that showcases both the ways that Indian-Americans practice their faith traditions in the United States, and the ways that Indian faith traditions have been adopted by American communities.” According to the offering, “The images will capture the diversity of the Indian-American community, so that a broad range of religious traditions are depicted.
These numbers are small compared to, say, the malfeasance and waste at the Department of Veterans Affairs. But that doesn’t mean we shouldn’t get upset in addition to being amused.
Think about it from this perspective. The amounts being wasted in this example are equal to the entire federal tax burden for several American families.
Do any of us think it’s okay to confiscate so much of their income and then have it squandered so pointlessly and irresponsibly?
But remember that the federal government doesn’t have a monopoly on foolish and stupid behavior.
Here’s another example of inane government behavior. And you won’t be surprised that it took place in California because, as Reasonreports, it involved a raid against an establishment serving probiotic tea.
Last Friday, an undercover officer from the state’s Alcohol Beverage Control (ABC) “infiltrated the temple,” Vice reports, “clearing the way for a 9 PM incursion by five officers.” What manner of crazy bootlegged hooch were the agents there to confiscate? Kombucha. Blueberry kombucha. For the uninitiated, kombucha is a type of carbonated, probiotic tea, popular among hipsters and health foodies. It’s made by mixing regular tea, sugar, and a “symbiotic culture of bacteria and yeast” known as the “mother” and letting the whole business ferment for a few days. The end result is a somewhat vinegar-like beverage that’s packed with good bacteria (à la yogurt) and ever-so-slightly alcoholic….But because the tea contains slightly above 0.5 percent alcohol, it requires a special license to sell say ABC agents, who cited a Full Circle rep for misdemeanor selling alcohol without a license.
I rarely delve into foreign policy and defense issues. And when I do, such as my post about the conflict in Ukraine, it’s usually because it gives me an opportunity to draw attention to a topic that is in my bailiwick (in the case of Ukraine, it gave me an excuse to write about federalism).
With this caveat in mind, let’s turn our attention to the Middle East. Unless you’re a hermit living in a remote cave, you presumably know that Israel is locked in another fight with Hamas.
I’ve previously explained that I’m very sympathetic to the notion that Israel has a right to defend itself.
But supporting Israel’s right to self defense doesn’t mean I should foot the bill. Yet that’s what’s happening. According to Wikipedia, Washington sends about $3 billion per year to subsidize Israel’s military.
And now that amount will be even larger because Congress just approved another $225 million to help finance Israel’s missle-defense system.
Congress approved a $225 million package to replenish Israel’s missile defenses with its last order of business before a five-week recess… The House’s 395-8 vote in favor late Friday followed Senate adoption of the legislation by voice vote earlier in the day. The money is directed toward restocking Israel’s Iron Dome, which has been credited with shooting down dozens of incoming rockets fired by Palestinian militants over 3½ weeks of war. …Iron Dome has enjoyed strong U.S. technological and financial support. Throughout its history, the U.S. has provided more than $700 million to help Israel cover costs for batteries, interceptors, production costs and maintenance, the Congressional Research Service said. The total already appeared set to climb above $1 billion after Senate appropriators doubled the Obama administration’s request for Iron Dome funding for fiscal 2015. Now it seems likely to rise even further.
But this doesn’t mean everyone is happy about all this spending.
Some libertarian-leaning fiscal conservatives opposed the added subsidies, or at least wanted Congress to come up with offsetting cuts.
Despite almost universal support for Israel in Congress, the Iron Dome money appeared in doubt only a day ago as Senate efforts stalled after an effort by Republican Sen. Tom Coburn of Oklahoma to find cuts elsewhere in the budget to pay for the aid.…Voting against the measure in the House were…Republicans Justin Amash of Michigan, Walter Jones of North Carolina, Thomas Massie of Kentucky and Mark Sanford of South Carolina.
For what it’s worth, I applaud those four House Republicans.
I’m motivated in part by a desire to limit the burden of government spending in America, but I also think that Israel easily could afford more military outlays if it pared back its overly generous welfare state.
If you look at the IMF data, government spending consumes about 43.8 percent of Israel’s economic output. And according to the CIA Factbook, Israel’s military budget amounts to about 5.7 percent of GDP.
I’m not a math genius, but that certainly suggests to me that Israel’s government is diverting about 38 percent of economic output for non-military spending.
If national defense is important and worthwhile (and it is), then Israel should prioritize and reduce domestic outlays.
Heck, that’s what Roosevelt did during World War II and what Truman did during the Korean War. If you don’t believe me, look at lines 31-34 of this OMB spreadsheet.
By the way, some people accuse these GOPers of being anti-Israel, but I think that charge is grossly unfair. I’m not personally close to any of the Republicans who voted against the Iron Dome funding, but I’ve met and talked to all of them and I’ve followed their careers. Suffice to say that I’ve never heard even the slightest hint that any of them harbor any anti-Israel or anti-Jewish sentiments.
Indeed, here’s some of what Justin Amash wrote back in 2012.
Israel is our closest friend in a very troubled region. Our national defense benefits from Israel’s ability to defend itself and to serve as a check against neighboring authoritarian regimes and extremists. Assisting with training and the development of Israel’s military capacity allows the U.S. to take a less interventionist role in the region. I am hopeful that American troops soon can leave the region and Israel and its neighbors can live in peace without U.S. aid or involvement.
The last sentence is a pretty good description of libertarian foreign policy: Be prepared to defend ourselves, but don’t look for trouble outside our borders.
P.S. The government of Israel pays for people who do nothing but pray. Which means that my tax dollars are picking up part of the tab. Prayer is presumably a good thing. Just don’t ask me to pay for it.
P.P.S. While Israel’s government does dumb things, the governments opposing Israel sometime engage in truly evil acts.
P.P.P.S. If you want to learn more about the libertarian approach to foreign policy, my Cato colleagues are the real experts. I also call your attention to these thoughts fromMark Steyn,George Will, andSteve Chapman.
I certainly take second place to nobody in my utter contempt for Dominique Strauss-Kahn, the head of the International Monetary Fund. Who knew that forcing yourself (allegedly) on women could earn you a reputation as “the Great Seducer”? I guess my failure to understand means I’m just a backwards and provincial American.
But I’m also a big believer in kicking an enemy while he’s vulnerable, so let’s shift to the International Monetary Fund. Here are some passages from a new column by my Cato colleague Doug Bandow. He points out that the IMF has a horrible track record of promoting and facilitating big government.
…the rape charges against him symbolize the IMF: an institution of privilege that routinely acts to the disadvantage of the vulnerable. The IMF’s founding purpose vanished when the system of fixed exchange rates collapsed in the early 1970s. But instead of closing up shop (no jobs for international bureaucrats in that!), the IMF switched to promoting development. That is, it became a welfare program for Third World governments (and, more recently, for Eastern Europe and even Greece). The IMF spent decades subsidizing the world’s economic basket cases. Few, if any, advanced because of its programs. …the agency often got “wise” wrong. It often focused on narrow accounting data, with perverse consequences — such as forcing governments to raise taxes rather than cut spending. …Years ago, economist John Williamson pointed to the problem of the IMF feeling pressure “to lend money in order to justify having it.” Indeed, the IMF seems to measure success by making loans. As a result, its cash often acted as a general subsidy for collectivist economic policies. (Williamson once defended the organization against the criticism that it was too market-oriented by pointing to its loans to several unreconstructed communist states.) Indeed, the agency proudly disclaimed any bias against collectivist systems, pointing to “programs in all types of economies” which had “accommodated such nonmarket devices as production controls, administered prices and subsidies.” It sometimes seems to favor the most perverse policies. For instance, in the IMF’s first 40 years, India collected more money from it than any other developing state — at a time when India was pursuing a Soviet-style industrialization program.
Ironically, some people are arguing that it is unfortunate that Strauss-Kahn is in jail at such a critical time, with several European welfare states teetering on the edge of default.
But this is actually very good news. If there is any chance of saving Europe, it will be precisely because bailouts stop and nations are forced to finally fix the awful big-government policies that have crippled growth and bloated budgets, thus leading to fiscal crises. Doug makes this essential point in the conclusion to his column, and also makes the key argument that it’s time to stop the handouts to this corrupt and wasteful bureaucracy.
The IMF’s loans have often likely postponed reform — allowing governments to keep going without making the tough changes that lead to long-term growth. That appears to be happening in Greece now — where the Fund has pushed more lending and a bigger bail-out (to the consternation of Germany, which is picking up much of the bill). Strauss-Kahn may finally have done a true public service by focusing attention on the IMF. With America drowning in red ink, Washington should stop throwing good money at this pernicious institution.
P.S. For those who want to hoist Europeans on their own petard, Tessa Berenson has a great little column at the Frum Forum pointing out how many of the political elite on the other side of the Atlantic thought it was horrible and inexcusable when an American head of the World Bank arranged for a pay raise for his girlfriend. The Europeans were right at the time, but they now turn a blind eye at a far more odious episode today.
Here’s one of those “not just no, but Hell No” issues. The United Nations has put together a group of global collectivists to concoct a plan of global taxes. These new levies, on things such as airfares and energy use, would be used to finance bribes (oops, I mean foreign aid) to lure developing nations into a global warming (oops, I mean climate change) regime.
Carbon taxes, add-ons to international air fares and a levy on cross-border money movements are among ways being considered by a panel of the world’s leading economists to raise a staggering $100 billion a year to fight climate change. British economist Nicholas Stern told international climate negotiators Thursday that government regulation and public money also will be needed to create incentives for private investment in industries that emit fewer greenhouse gases. In short, a new industrial revolution is needed to move the world away from fossil fuels to low carbon growth, he said. “It will be extremely exciting, dynamic and productive,” said Stern, one of 18 experts in public finance on an advisory panel appointed by U.N. Secretary-General Ban Ki-moon. A climate summit held in Copenhagen in December was determined to mobilize $100 billion a year by 2020 to help poor countries adapt to climate change and reduce emissions of carbon dioxide trapping the sun’s heat. But the 120 world leaders who met in the Danish capital offered no ideas on how to raise that sum — $1 trillion every decade — prompting Ban to appoint his high-level advisory group. …The advisory panel is chaired by the prime ministers of Norway and Ethiopia and the president of Guyana. Its members include French Finance Minister Christine Lagarde, White House economic adviser Lawrence Summers, billionaire financier George Soros and public planners from China, India, Singapore and several international banks.
Advocates of limited government generally focus on domestic spending, pork-barrel projects, and entitlement programs. This is target-rich territory, to be sure, and especially inviting because most of the relevant programs and department shouldn’t exist. But just because national defense is a legitimate function of the federal government, that doesn’t mean that national security outlays are somehow immune from waste, fraud, and abuse. Here’s an all-too-typical story from Federal News Radio about the Defense Department being unable to account for a staggering 95 percent-plus of the funds channeled through the Development Fund for Iraq.
The Defense Department is unable to account for $8.7 billion of the $9.1 billion in Development Fund for Iraq monies in received for reconstruction in Iraq. This according to a study published today by the Special Inspector General for Iraq Reconstruction. …The Special Inspector General for Iraq Reconstruction (SIGIR) finds that only one Defense organization actually set up the accounts required by the Treasury. “The breakdown in controls left the funds vulnerable to inappropriate uses and undetected loss,” SIGIR says. The study recommends that the Secretary of Defense create new accounting and reporting procedures to avoid such mistakes in the future. It also recommends designating an executive agent to oversee progress, establishing measurable milestones, and determining whether any DoD organizations are still holding DFI funds.
In general, I don’t pay too much attention to issues in the Middle East. I know we squander $billions on foreign aid to prop up socialist policies in Egypt and Israel, and I obviously would like to see an end to that wasteful spending. But I’ve never had strong opinions on the foreign policy issues in the region that get most of the attention. That being said, I found myself somewhat sympathetic to Charles Krauthammer’s column on the topic. There’s no question that there is a campaign to end Israel’s blockade. And there’s no question that an end to the blockade will lead to shipments of weapons that would be used to attack Israel. So unless one wants Israel to be wiped out (or at least endlessly attacked), doesn’t Israel have no choice but to maintain a blockade? If your answer is no, what’s the alternative?
…the blockade is not just perfectly rational, it is perfectly legal. Gaza under Hamas is a self-declared enemy of Israel — a declaration backed up by more than 4,000 rockets fired at Israeli civilian territory. Yet having pledged itself to unceasing belligerency, Hamas claims victimhood when Israel imposes a blockade to prevent Hamas from arming itself with still more rockets. In World War II, with full international legality, the United States blockaded Germany and Japan. And during the October 1962 missile crisis, we blockaded (“quarantined”) Cuba. Arms-bearing Russian ships headed to Cuba turned back because the Soviets knew that the U.S. Navy would either board them or sink them. Yet Israel is accused of international criminality for doing precisely what John Kennedy did: impose a naval blockade to prevent a hostile state from acquiring lethal weaponry. Oh, but weren’t the Gaza-bound ships on a mission of humanitarian relief? No. Otherwise they would have accepted Israel’s offer to bring their supplies to an Israeli port, be inspected for military materiel and have the rest trucked by Israel into Gaza — as every week 10,000 tons of food, medicine and other humanitarian supplies are sent by Israel to Gaza. Why was the offer refused? Because, as organizer Greta Berlin admitted, the flotilla was not about humanitarian relief but about breaking the blockade, i.e., ending Israel’s inspection regime, which would mean unlimited shipping into Gaza and thus the unlimited arming of Hamas. … The whole point of this relentless international campaign is to deprive Israel of any legitimate form of self-defense.
Let’s all be thankful this holiday season for our Founding Fathers, who wisely created a system based on separation of power. As such, when the Secretary of State blithely pontificates about fleecing American tapxayers to help finance $100 billion of added foreign aid, the good news is that this money can only be squandered if the House and Senate also agree. That’s a real possibility, of course, but at least there’s some hope that common sense will prevail since the fiscal burden of government already is far too large. Here’s a NY Daily News report on what’s happening in Copenhagen, including worrisome signs that politicians who don’t pay for their own travel are planning to make the rest of us pay more:
“The US is prepared to work with other countries toward a goal of jointly mobilizing $100 billion a year by 2020 to address the climate change needs of developing countries,” Secretary of State Hillary Clinton said. …While she would not disclose how much the U.S. would be contribution to the climate fund, Clinton said there would be a fair amount contributed to the pot that would be made available in 2020. The finances will reportedly be raised partially by taxing aviation and shipping, as proposed by the European Union.
Pat Buchanan, meanwhile, cuts to the heart of the issue, explaining for Townhall.com that global warming is a “racket” for the benefits of political elites:
“Zenawi said he would accept $30 billion in the short term, rising to $100 billion by 2020. … This was seen as a key concession by developing countries, which had previously spurned that figure … as too low.” There was a time when a U.S. diplomat would have burst out laughing after listening to a Third World con artist like this. But not the Obamaites. They are already ponying up. Secretary of Agriculture Tom Vilsack just pledged $1 billion at Copenhagen to developing countries who preserve their forests. Thus, America, $12 trillion in debt and facing a second straight $1.4 trillion deficit, will borrow another $1 billion from China to send to Brazil to bribe them to stop cutting down their trees. When you slice through the blather about marooned bears and melting ice caps, oceans rising and cities sinking, global warming is a racket and a crock. It is all about money and power. Copenhagen has always been about an endless transfer of wealth from America, Europe and Japan and creation of a global bureaucracy to control the pace of world economic and industrial development.
The Wall Street Journal’s editorial page lifts a rock and looks at the sordid redistribution of other people’s money that is happening in Copenhagen. The unavoidable conclusion is that developing countries are there to cash in on a new foreign-aid boondoggle and rich countries are there because politicians are seeking a new source of power over their national economies:
Monday’s walkout revealed the real reason that the developing world is in Copenhagen in the first place: They see climate change as a potential foreign-aid bonanza, and they are at the table to leverage the West’s environmental angst into massive transfers of wealth. …the developed world has been pouring trillions of dollars into development aid in various forms for decades, with little to show for it. The reasons are well-known: Corruption, political oppression, government control of the economy and the absence of rule of law combine to keep poor countries poor. And those factors also ensure that most aid is squandered or skimmed off the top.Recasting foreign aid as “climate mitigation” won’t change any of that. …The G-77 scoffed at a European offer of €7.2 billion ($10 billion) over three years. Instead, the Sudanese chairman of the group, Lumumba Stanislaus Di-Aping, suggested in an interview with Mother Jones magazine that something on the order of a trillion dollars, or more, would be appropriate. “The world’s scientists and policy decision makers have publicly stated that this is the greatest risk humanity has ever faced,” says Mr. Di-Aping. “Now if that’s the case, it’s very strange that $10 billion is considered adequate financing.” Mr. Di-Aping deserves credit for taking the climate alarmists on their own terms and drawing consistent conclusions.
because rich countries are rich.which he accused of holding back developing nations with trade sanctions and demands for political reform. …His signature project has ballooned into a $1 trillion endeavor, but it is still only a loosely coordinated network of power plants, ports, roads and railways. It has generated significant controversy, with host countries like Sri L anka and Nepal struggling to overcome mounting debt distress… A white paper released last week lays out Xi’s bold claim that China, through the Belt and Road, offers a new route to wealth for nations disillusioned with Western-led globalization, and promises a greater share of spoils for the Global South if the world develops according to Beijing’s playbook. “It is no longer acceptable that only a few countries dominate world economic development, control economic rules, and enjoy development fruits,” the paper stated.
International Liberty 